Economist: Shale fever soon will decline

Michelle Michot Foss, chief energy economist for the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas, speaking at Norwegian Finance Day in Houston. (Emily Pickrell/Houston Chronicle)

HOUSTON — A Houston energy economist predicts that shale fever is about to ebb, and the industry soon will be looking to offshore fields for reliable and lucrative investment payoffs.

Familiarity with the Gulf of Mexico will lure producers after years of fighting concerns of landowners and environmentalists over hydraulic fracturing in shale plays nationwide, said Michelle Michot Foss, chief energy economist for the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas.

“There is a level of comfort in working in the Gulf of Mexico,” Foss said. “People understand the risk there. You can get a 5,000-barrel-per-day well, a 30 percent return, and you don’t have to deal with the voters of Fort Collins. After watching all the weight of attention on the onshore plays, offshore opportunities are going to get their time in the sun, as everyone migrates back to the Gulf of Mexico.”

Foss was one of several speakers addressing an international investment audience Tuesday morning at Norwegian Finance Day in Houston.

The recent drop in U.S. natural gas prices has created a challenge in developing onshore shale plays profitably. The Henry Hub natural gas price hovers around $5.40 per million British thermal units now — a modest recovery from its $3 price just months ago, but well below the $13.58 peak it reached in 2008.

And, in terms of value, it’s far lower than the $100 per barrel that domestic crude currently commands. That’s creating a financing challenge in some shale plays, which now are largely financed by liquids production.

“The reason we can produce gas cheaply is because we are already producing the oil and liquids in the same play for good crude oil prices,” Foss said. “The reality is that liquids are financing natural gas in the U.S. Capital providers are seeing the weak returns and as a result you don’t get the production that you need.”

Foss also emphasized that while there are abundant resources in new shale plays, the jury is still out on whether they can be extracted profitably, because of the pricey technology and intensive labor required to do so.

And in some plays, such as the Niobrara Shale in Colorado, infrastructure limitations have made potential production much more costly than competing offshore oil, Foss said.

“Plays like the Mississippi Lime are fraught with difficulties and have not yielded the opportunities that people once hoped for,” she said. “We don’t have pipelines, we don’t have storage, we don’t have capacity.”

Financing for new shale plays will also become more difficult, as operators move to areas where the oil and gas is more difficult to access.

“The best acreage is in play right now,” Foss said. “We are working through those locations very fast, and that is what has created the glut of oil. But people look at these businesses more closely – no one wants to lend money on dry holes.”

A shale gas well is seen in May 2011 in Lebien, Poland, where Lane Energy Poland company drilled to assess economic viability of shale gas deposits, reported to be substantial in Poland.

A shale gas well is seen in May 2011 in Lebien, Poland, where Lane Energy Poland company drilled to assess economic viability of shale gas deposits, reported to be substantial in Poland.

Photo: Andrzej.J. Gojke / Associated Press

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A derrick mast stands behind a spare capped well head at San Leon Energy Plc's Chopin-1 shale gas exploration well in Pinczow, Poland, on Sunday, Sept. 18, 2011.

A derrick mast stands behind a spare capped well head at San Leon Energy Plc's Chopin-1 shale gas exploration well in Pinczow, Poland, on Sunday, Sept. 18, 2011.

Photo: John Guillemin / Bloomberg

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Poland Deputy Environment Minister Piotr Wozniak at the State Geological Institute in Warsaw presents a report by the institute that says that Poland's estimated recoverable shale gas reserves are between 346 and 768 billion cubic meters, below expectations, on Wednesday, March 21, 2012. Poland is hoping that unconventional gas will help to break its dependence on Russian gas imports. less

Poland Deputy Environment Minister Piotr Wozniak at the State Geological Institute in Warsaw presents a report by the institute that says that Poland's estimated recoverable shale gas reserves are between 346 ... more

Photo: Czarek Sokolowski / Associated Press

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Samples of shale rocks recovered in central and eastern Poland are displayed at the State Geological Institute in Warsaw, Poland on Wednesday, March 21, 2012.

Samples of shale rocks recovered in central and eastern Poland are displayed at the State Geological Institute in Warsaw, Poland on Wednesday, March 21, 2012.

Photo: Czarek Sokolowski / Associated Press

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Samples of shale rocks and maps of Poland's shale gas deposits and exploration licenses are displayed at the State Geological Institute in Warsaw, Poland on Wednesday, March 21, 2012 during the presentation of the institute's report, which estimated the nation's recoverable shale gas reserves at between 346 and 768 billion cubic meters, below expectations. Poland is hoping that unconventional gas will help to break its dependence on Russian gas imports. less

Samples of shale rocks and maps of Poland's shale gas deposits and exploration licenses are displayed at the State Geological Institute in Warsaw, Poland on Wednesday, March 21, 2012 during the presentation of ... more

Photo: Czarek Sokolowski / Associated Press

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At a shale gas well in northern Poland, Lane Energy Poland company completes test drilling to assess economic viability of shale gas deposits, reported to be substantial in Poland.

At a shale gas well in northern Poland, Lane Energy Poland company completes test drilling to assess economic viability of shale gas deposits, reported to be substantial in Poland.

Photo: Andrzej.J. Gojke / Associated Press

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A rig hand removes drill pipe from a natural gas well owned by EQT Corp. at a hydraulic fracturing site located atop the Marcellus shale rock formation in Washington Township, Pennsylvania, U.S. Output from shale deposits including the Marcellus surged 10-fold between 2005 and 2013, to account for a third of the country's gas production, government data show. The increase in production is bringing development to an economically depressed region that lies atop the Marcellus shale, a rock formation that produces more natural gas than Saudi Arabia. less

A rig hand removes drill pipe from a natural gas well owned by EQT Corp. at a hydraulic fracturing site located atop the Marcellus shale rock formation in Washington Township, Pennsylvania, U.S. Output from ... more

Photo: Ty Wright / Bloomberg

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A yard sign in front of Michael and Susan Knoll's North Texas home describes their feelings toward natural-gas drilling near residential areas of the Barnett Shale.

A yard sign in front of Michael and Susan Knoll's North Texas home describes their feelings toward natural-gas drilling near residential areas of the Barnett Shale.

Photo: Ronnie Crocker / Houston Chronicle

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An anti-fracking protester stands on the top of a truck carrying chemicals to the Barton Moss gas fracking facility on January 13, 2014 in Barton, England. Environmental protesters and anti-gas fracking campaigners blocked roads and climbed on trucks arriving at the Barton Moss gas exploration site. less

An anti-fracking protester stands on the top of a truck carrying chemicals to the Barton Moss gas fracking facility on January 13, 2014 in Barton, England. Environmental protesters and anti-gas fracking ... more

Photo: Christopher Furlong / Getty Images

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Police officers restrain an anti-fracking protester standing on the top of a truck carrying chemicals to the Barton Moss gas fracking facility on January 13, 2014 in Barton, England. Environmental protesters and anti gas fracking campaigners blocked roads and climbed on trucks arriving at the Barton Moss gas exploration site. less

Police officers restrain an anti-fracking protester standing on the top of a truck carrying chemicals to the Barton Moss gas fracking facility on January 13, 2014 in Barton, England. Environmental protesters ... more

Photo: Christopher Furlong / Getty Images

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Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed it will invest about £30 million in the shale drilling project in Gainsborough, and it is believed to be the first major energy firm to invest in U.K. fracking. Prime Minister David Cameron indicated councils would receive a significant financial boost from the business rates collected from controversial shale gas schemes, with local authorities receiving 100 percent of the business rates, double the usual 50 percent. less

Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed it will invest about £30 ... more

Photo: WPA Pool / Getty Images

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Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed it will invest about £30 million in the shale drilling project in Gainsborough, and it is believed to be the first major energy firm to invest in U.K. fracking. Prime Minister David Cameron indicated councils would receive a significant financial boost from the business rates collected from controversial shale gas schemes, with local authorities receiving 100 percent of the business rates, double the usual 50 percent. less

Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed it will invest about £30 ... more

Photo: WPA Pool / Getty Images

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Protesters demonstrate as Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed it will invest about £30 million in the shale drilling project in Gainsborough, and it is believed to be the first major energy firm to invest in UK fracking. Prime Minister David Cameron indicated councils would receive a significant financial boost from the business rates collected from controversial shale gas schemes, with local authorities receiving 100 percent of the business rates, double the usual 50 percent. less

Protesters demonstrate as Great Britain Prime Minister David Cameron visits the Total Oil Depot shale drilling site in Gainsborough, Lincolnshire in England on January 13, 2014. French company Total confirmed ... more

Photo: WPA Pool / Getty Images

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Anti-fracking activists demonstrate near the Cuadrilla exploratory drilling site in Balcombe, England, as campaigners set up a six-day "Reclaim the Power" action camp outside the village on Friday Aug.16, 2013. Energy company Cuadrilla Resources Ltd. said it temporarily suspended drilling at an exploration site in southern England amid protests from residents and environmentalists opposed to shale gas extraction. less

Anti-fracking activists demonstrate near the Cuadrilla exploratory drilling site in Balcombe, England, as campaigners set up a six-day "Reclaim the Power" action camp outside the village on Friday Aug.16, ... more

Photo: Gareth Fuller / Associated Press

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A Vantage Energy natural gas rig works in Arlington, Texas in the Barnett Shale in December 2013.

A Vantage Energy natural gas rig works in Arlington, Texas in the Barnett Shale in December 2013.

Photo: Paul Moseley / Star-Telegram

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Finished, gas-producing wells at Loyalsock in Trout Run, Pa.

Finished, gas-producing wells at Loyalsock in Trout Run, Pa.

Photo: Clem Murray / McClatchy-Tribune News Service

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Oil wells are pumped in the Midway-Sunset oil field in Fellows, Calif. in January 2013. The Monterey Shale, largely untouched territory near Midway-Sunset, could represent the future of California's oil industry - and a potential arena for conflict between drillers and the state's powerful environmental interests. less

Oil wells are pumped in the Midway-Sunset oil field in Fellows, Calif. in January 2013. The Monterey Shale, largely untouched territory near Midway-Sunset, could represent the future of California's oil ... more

Photo: JIM WILSON / NYT

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Cattle rest on a field near Helena, Texas in Karnes County, a key area of the prolific Eagle Ford Shale.

Cattle rest on a field near Helena, Texas in Karnes County, a key area of the prolific Eagle Ford Shale.

Photo: Jerry Lara / Associated Press

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Warning signs are required around the wellhead during a frac job at a well on a ranch southwest of Ben Bolt, Texas. The well, located near the Jim Wells and Duvall County line, was drilled to a depth of over one mile in September 2013. less

Warning signs are required around the wellhead during a frac job at a well on a ranch southwest of Ben Bolt, Texas. The well, located near the Jim Wells and Duvall County line, was drilled to a depth of over ... more